Saturday, March 9, 2013

How Much Do Tasting Rooms Make?

I had a good meeting with one of my longest tenured clients this past month. We were talking over strategy and the discussion evolved to discussing their tasting room. Specifically, they don't have one - so should they?

My client is in a region where there is an agglomeration of tasting rooms. The winery is doing well without one. A little off the beaten path, if they did put one in they would need to develop some strategies to get people to the winery. Wanting to hone in on a measure of expected return in their planning, they asked me what's the ROI of a successful tasting room? I could have given them the stock answer and talked about measures of profitability, but the reality is there is no such thing as an average ROI on a tasting room. If fact you are missing the point of a tasting room if success for you is defined as profit.

This Person was Shocked

This might shock some but a tasting room shouldn't be considered a stand alone profit center. Sure you can do the math ... revenue minus costs and hopefully there's a profit. But a retail room is more appropriately viewed as a support element in an integrated marketing plan.

Your view and bias of what a successful tasting room is, will be reflected in the way you measure it. Most wineries choose to define that success in terms of direct profit: direct sales minus direct expenses and some allocation of overhead. I'd love to be corrected by readers, but I'll bet a bottle of wine ( .... my choice in bottle of course....) that there isn't a single winery that develops strategies, process and measures ROI to include what I consider to be the most important metric of a successful tasting room: The Second Sale.

What do I mean by that? Go back to strategy. Say you measure success in the retail room by profit. Your strategy then will revolve around ways to boost profitability. You will develop calling programs on the right hotels, talk to concierges, put fliers in the hotel visitor rack - all with the hope of getting more people into the tasting room. The more people in the tasting room, the better chance at higher sales. Its the theory that if you get to the plate enough, you'll get a hit. Whats wrong with that? Nothing except the most expensive sale is the first one. Look at all the costs aimed at getting people into the facility in the first place. Can't they buy it on-line or someplace else without making the investment? If you fully cost burden your first sale, most wineries will lose money on that sale, so your real return of the tasting room might be negative.

The value of a buyerof a case of wine in your retail room is the profit in that case. That's it. The value of a clientis a lifetime revenue stream. Measure that. That's a huge difference.

Back to the metrics, what is your conversion rate in visitors? What is your success rate at a second sale after someone has tasted? What about metrics on the places that are driving visitors? How many people from the hotels you're targeting are purchasing a second time? Do you get more return sales from those in the Marriott, the Westin, or the No Tell Motel? Whats the rate of second sales from referrals from your concierges or travel planners and travel sites? Which of your clients is an evangelist and is naturally recruiting followers? Are you tracking that? The metrics that focus on the second sale, and efficiencies created by measuring your sales tactics which include the second sale is something our industry is not fully embracing.

Go ahead and pat yourself on the back if the revenue minus direct expenses equals profit in your tasting room. Make sure your tasting room staff feels good when someone walks out of your
tasting room with a couple cases of wine. But if you don't know who that was, how to contact them and thank them ..... don't know if they ever buy another bottle of your wine - then you will never know the ROI of a tasting room.

What do you think? Do you measure the second sale? What metrics do you employ in the tasting room to measure success. Log in and add to the discussion below.

40 comments:

Good post, as you allude to you can take it past the tasting room into many marketing campaigns. It's a little involved but you measure how much each marketing channel a) costs to acquire each customer and b) the margin from the wine each customers buys over a period of time. Margin less cost to acquire equals a form of lifetime value. Sometimes its easy to calculate e.g. internet advertising, sometimes its hard e.g. magazine advertising, seo and tweeting.

Thanks for signing in and contributing Bruce. Totally agree with you on measurements being easy to almost impossible. I think you have to start with what's important (did I mention the second sale?) and measure the important inputs. While you can act like a scoop net and grab all cars going by your winery ...... should you? Are they the best opportunity for you? Maybe your tasting room is full with walk-ins. What percentage of those are just taking a trip to wine country and paying the fee to occupy the bar?

Each winery is a little different in what is important, but all have the same long term goal: Build the brand.

Thanks for logging in and contributing Kurt. I'd say that is a possible metric, but I think its missing the volume component, eg, how much someone is buying in a club. Many clubs have different options and offerings and you would want to segregate both tenure and revenue.

Your excellent post brings up a question--are we approaching saturation of potential wine club members? In other words, will there be a transition to a time when pretty much everyone who wanted to be member of some club or other has signed up and we would then be just taking business from each other in a slower growing market? Is there any research on why visitors *don't* join wine clubs in general?

Thanks for logging in PG and for the comments. We are only approaching a saturation in wine clubs that don't evolve and raise the bar on serving their clientele. Still too many that have a periodic shipment of whatever they want to send the club.... not knowing if the member wants it. That winery probably doesn't know what that client left.

I don't know if there is research done on why people don't join. The focus should be on why people do join I would think .... but I don't know of research there either.

Saturation could come statistically....it can come in any mature industry, which eventually decays into the commoditization of the offering (product/services) at which time it becomes important to figure out how to differentiate on some variable.

A tasting room can be a gold mine. Few tasting rooms actually count visitors so revenue per visitor is an estimate usually based on some form of measuring tastings. Fewer still track where the visitors home state is although visitors are ask "where is home" to pre qualify for a wine club. Near zero track "Why did you visit our winery". So any baseline metrics will be at best "dodgy". The tasting room is the most important "brand touch point" for a winery because you have the opportunity to tell the brand story face to face, and create a long term relationship not just sell wine. Tasting rooms are in the business of providing "positive experiences" some related to wine some not. Given the importance of the tasting room staff to the outcome of each visitor's experience you would expect the staff to be well trained, paid a living wage, allowed to have tips via credit card, and given incentives for sales. That of course is not the current climate for the vast majority of tasting room staff.

As an aside. There is a web based software that uses a digital video camera and facial recognition software to identify ethnicity, age and sex. The camera sends the data to a digital billboard in the mall where the camera is located and it then serves up an advertisment based on the information. The software can be easily adapted by winery tasting rooms, which would provide exact visitor information including how long they spent in the tasting room.

Thanks Anon 3:36. That's a cool tip. I think there are probably a raft of tech tools that we aren't yet employing for success. Its wide open for market leadership. At this point, I don't have any winery I would point to as emblematic of best practices. I think we are that far behind.

Actually, I've tried to track the second sale in terms of ecomm reorders and return visits. It turns out that TR visitors are more likely to order online than return to the TR. And are not very likely to do either.

It got me thinking that most TR visitors are "one and done", they hit your winery to check it out and scratch it off the list, then they are off to one of the thousands of other TRs in CA. Return visitors to the TR were around 2% of our TR traffic.

Now try tracking sales in the broad market generated by TR visits. Next to impossible to get good, reliable, actionable data and VERY expensive. I've heard Marketing VPs at the Big Boys claim they can track it but let's say I remain skeptical...

You need to keep the TR on a short leash as the recurring benefits are limited and the costs explode rapidly.

Love this comment: You need to keep the TR on a short leash as the recurring benefits are limited and the costs explode rapidly.

I agree with you. Its a practical reality that TR's need to be managed and getting all the information needed for second sales is often hard or expensive.

I am positioning for a wider view of what the tasting room is capable of. While I accept its difficult to track a second sale, I don't think we've exhausted the mechanisms to do so. Loyalty programs for instance. When someone comes into the tasting room, why not hand them a card with a 10% discount and free shipping on all purchases for the next year since they had made the trip to the tasting room? Maybe thats not a Club Member, but its something close and you can then track that second sale when they order on-line.

There are thousands of ways we can tackle this issue that haven't been tried.

Solid post Rob. I'd give up your night job as auctioneer and pursue this blogging concept. Actually, very good post and insight for our wineries. There is more to conversion than some may preach. More to sales in the tasting room than many understand. The second sale is the most critical as it leads to the third and fourth. Long term customers, ambassadors of your brand are essential to profit for the long term.

Thanks for the advice Dewey. I am in complete agreement on the Auctioneering career. Fritz Hattons career is safe. As an industry, we have quite a way to go in retail direct skills. Hoping I can add some more to the discussion on starring this next Sunday.

While I understand that this article is based on the "majority' of (various size)TRs out there please note that there are some that absolutely have it dialed in. I recently worked for 1.5 years in one of the highest trafficked TRs on Hwy 29 smack dab in the middle of the Napa Valley. We had weekly (if not daily) reports and meetings on this exact topic. 80% of all sales are driven thru that TR and the TR close rates / WC sign ups + repeat sales thru web, WC and phone are tracked daily.No sales data means no sales plan. This particular TR was run with a close eye to those details.

Thanks Anon 10:35,Without question there are some tasting roomks out there that rock. While I can name several that are very profitable and have as good a handle on pieces of this, when you add in CRM, metris and strategies on driving the right kind of traffic versus opening doors and catching from the current, I don't yet see a role model I can point out that is nailing it.

I work at a 75,000 case totally DTC operation, where our wine club and repeat case sales represent 45,000 cases per year. Everything we do is to encourage that second sale, as well as getting these customers back to the winery, and with friends. One thing we do not do, and should, is effectively target local communities. As we are in St. Helena, we are 2 hours from almost anywhere in the Bay Area. Wineries near major population centers need to target these potential visitors as potential repeat customers as well as brand ambassadors.

Love the conceptual framework and that you are thinking about the targeting component. It sounds like you are an ecommerce company instead of a winery, and thats not a bad way to think about a winery's place in the business today. Noww add the tactics for targeting the communities and then measurements for the tactics you employ, and you have the beginning of a new path to more and more and more. Great to hear your firm is so evolved. Sad you aren't my client!! :)

“Marketers Reach Out to Loyal Customers;As Holidays Near, Retailers Tap Statistical Models,Relying More on Targeted Ads Than a Shotgun Approach”

By Emily SteelStaff Reporter

It’s an adage of the business: Persuading a satisfied customer to return is cheaper than attracting a new one. Now, in the struggle to do more with less, that concept is becoming even more important.

Acquiring a new customer costs about five to seven times as much as maintaining a profitable relationship with an existing customer, says Marc Fleishhacker, managing director at WPP’s Ogilvy Consulting, which designed the campaign for Sears.

But most fascinating to me was Michael Treacy’s address -- and the reaction it drew. . . .

The speech lasted an hour, and the book from which it was derived, Double-Digit Growth: How Great Companies Achieve It No Matter What, is 214 dense pages in paperback, but here’s the Cliffs Notes.

Substantive business growth in Western corporations is rare -- since 1997 Intel has grown slower than inflation and even P&G has managed only average growth of 2.4% in that period -- but entirely achievable. Not because there is a magic bullet (we all know bullets are bull), but because 10% or more can be eked out through discipline, hard work and attention to a handful of potential growth areas.

. . .

FOUR AREAS OF FOCUS

Those areas include: “share gain,” grabbing a percentage point or two at the expense of a competitor; “base retention,” stemming the loss of existing customers to the point where your churn rates fall below the average; “market positioning,” also known as showing up where the growth is going to happen; and “adjacent markets,” whereby a marketer moves into a related business. Treacy’s research has shown proper attention to any one of these will contribute a few percentage points of growth. Put them together and what do you have? Yep, double digits.

. . .

A great overview and an encouraging message. But the audience seemed disheartened; several told me they found the speech “depressing.” Confused, I quizzed a few, until one solved the riddle for me: “He said marketing is a difficult way to grow a business.”

A NARROW INTERPRETATION

The penny dropped. By “marketing” this executive meant the focus on “share gain,” which Treacy did, indeed, say was by far the “toughest way to grow.” In other words, the marketers interpreted their roles so narrowly -- as people who hawk for new business -- that Treacy’s message seemed to say they faced nothing but an uphill battle. His optimism about growth through customer retention, innovation and the identification of growth markets was lost on them.

This is a problem. A Spencer Stuart study showed CEOs expect the marketing department to drive growth, but many marketers are focused on only one growth avenue: customer acquisition. (And, worse still, on one tool to achieve that: purchasing, approving and post-justifying advertising).

Customer retention

Had Treacy encountered this issue? “Oh yes,” he said. “Look at Detroit. They give away an average of $4,000 on every car trying to find new buyers, not to mention the billions they spend on ads. How much do they spend on base retention tactics? Almost nothing. Despite the fact that with a two-thirds churn rate, a small improvement would yield major growth. The marketing department doesn’t think that’s their job.”

At the risk of getting thrown overboard next year, it seems to me there are a lot of marketers who simply don’t get the full scope of their jobs. Time to wake up, folks. Don’t be zeros, be double-digit heroes.

But most fascinating to me was Michael Treacy’s address -- and the reaction it drew. . . .

The speech lasted an hour, and the book from which it was derived, Double-Digit Growth: How Great Companies Achieve It No Matter What, is 214 dense pages in paperback, but here’s the Cliffs Notes.

Substantive business growth in Western corporations is rare -- since 1997 Intel has grown slower than inflation and even P&G has managed only average growth of 2.4% in that period -- but entirely achievable. Not because there is a magic bullet (we all know bullets are bull), but because 10% or more can be eked out through discipline, hard work and attention to a handful of potential growth areas.

. . .

FOUR AREAS OF FOCUS

Those areas include: “share gain,” grabbing a percentage point or two at the expense of a competitor; “base retention,” stemming the loss of existing customers to the point where your churn rates fall below the average; “market positioning,” also known as showing up where the growth is going to happen; and “adjacent markets,” whereby a marketer moves into a related business. Treacy’s research has shown proper attention to any one of these will contribute a few percentage points of growth. Put them together and what do you have? Yep, double digits.

. . .

A great overview and an encouraging message. But the audience seemed disheartened; several told me they found the speech “depressing.” Confused, I quizzed a few, until one solved the riddle for me: “He said marketing is a difficult way to grow a business.”

A NARROW INTERPRETATION

The penny dropped. By “marketing” this executive meant the focus on “share gain,” which Treacy did, indeed, say was by far the “toughest way to grow.” In other words, the marketers interpreted their roles so narrowly -- as people who hawk for new business -- that Treacy’s message seemed to say they faced nothing but an uphill battle. His optimism about growth through customer retention, innovation and the identification of growth markets was lost on them.

This is a problem. A Spencer Stuart study showed CEOs expect the marketing department to drive growth, but many marketers are focused on only one growth avenue: customer acquisition. (And, worse still, on one tool to achieve that: purchasing, approving and post-justifying advertising).

CUSTOMER RETENTION

Had Treacy encountered this issue? “Oh yes,” he said. “Look at Detroit. They give away an average of $4,000 on every car trying to find new buyers, not to mention the billions they spend on ads. How much do they spend on base retention tactics? Almost nothing. Despite the fact that with a two-thirds churn rate, a small improvement would yield major growth. The marketing department doesn’t think that’s their job.”

At the risk of getting thrown overboard next year, it seems to me there are a lot of marketers who simply don’t get the full scope of their jobs. Time to wake up, folks. Don’t be zeros, be double-digit heroes.

Customer retention advice, proffered from a Los Angeles marketer who does occasional work in the California wine industry.

~ ~ Bob Henry

Part three of three postings . . .

From CFO Magazine “Budgeting” Section(October 2004, Page 89ff):

“Testing the Top Line;Analyzing a company’s sources of revenue can bring insights into growth.”

By Joseph McCaffertyNews Editor

Most companies don't really manage top-line growth. They allocate resources to businesses they think will be most productive and hope the economy cooperates. But a growing number are taking a less passive approach, and studying revenue growth more carefully. They argue that quantifying the sources of revenue can yield a wealth of information, which results in more-targeted and more-effective decision-making. With the right discipline and analysis, they say, growing revenues can be as straightforward as cutting costs. Some companies go so far as to link the two efforts.

"The idea is to bring the same systematic analysis to growing revenue that we have brought to cost cutting," says Franklin Feder, vice president of analysis and planning at aluminum giant Alcoa Inc.

To that end, Alcoa uses a sources-of-revenue statement (SRS) that was developed by Michael Treacy, author of Double-Digit Growth and co-founder of consulting firm GEN3 Partners, in Boston. The information on revenue captured by traditional financial statements is woefully inadequate, argues Treacy. True, he says, sorting revenues by geographic market, business unit, or product line tells you the source of sales. But it does not explain the underlying reason for those sales. "If you look at what most companies have on revenue reporting, it's pathetic," he says.

Treacy's model breaks revenue into five categories:

1. Continuing sales to established customers (known as base retention). 2. Sales won from the competition (share gain). 3. New sales from expanding markets. 4. Moves into adjacent markets where core capabilities can be leveraged. 5. Entirely new lines of business unrelated to the core.

The basic method of compiling the SRS is fairly straightforward (see "How to Create an SRS," at the end of this article); most of the information needed is readily available. But the effort does require two estimates: an accurate measure of how fast the market is growing, and customer churn rates. Treacy says the extra work involved in producing these estimates is worth it. When companies look at the amount of revenue coming from each source, and the changes in each, they can spot opportunities or weaknesses and allocate resources more effectively. "It really becomes powerful when you get down to the business-unit level," he says.

. . .

SIDEBAR: “How TO CREATE AN SRS”

To product a sources-of-revenue statement, five steps are required in addition to establishing total revenues for comparable periods, as is commonly done for purposes of completing an income statement or a P&L.

1. Determine revenue from the core business by establishing the revenue gain or loss from entry to or exit from adjacent markets and the revenue gain from new lines of business, and subtracting this from total revenue.

2. Determine growth attributable to market positioning by estimating the market growth rate for the current period and multiplying this by the prior period's core revenue.

3. Determine the revenue not attributable to market growth by subtracting the amount determined in Step 2 from that determined in Step 1.

4. To calculate base retention revenue, estimate the customer churn rate, multiply it by the prior period's core revenue, and deduct this from the prior period's core revenue.

5. To determine revenue from market-share gain, subtract retention revenue, growth attributable to market positioning, and growth from new lines of business and from adjacent markets from core revenue.

The Issue: Despite their popularity, loyalty programs often fail to boost companies' market share.The Background: Many programs use monetary rewards to encourage repeat purchases. The problem is, not all shoppers care equally about discounts.The Bottom Line: To be effective, loyalty programs should be more individualized, offering different rewards to different shoppers, based on what they value.

Used by businesses for more than 25 years, loyalty programs aim to entice consumers to make repeat purchases by offering them rewards -- things like discounts on future purchases or points toward free airline tickets.

Since companies continue to expand them, one would think loyalty programs are powerful tools for boosting market share. Our research indicates many aren't, at least not as designed.

The biggest problem with loyalty programs, we would argue, is that most retailers adopt a one-size-fits-all approach: They use monetary rewards to encourage repeat purchases. But product discounts won't change buying behavior in the long run in shoppers who value things like personalized service, convenience or shopping pleasure more. These types of consumers may change their behavior to access the price promotion, but they likely will revert back to their regular brands or buying habits shortly thereafter, resulting in, at best, a temporary change in sales and market share.

Loyalty programs also seem to be mainly of interest to existing customers -- the heavier, more frequent, more loyal buyers of the store, who tend to live closer to it.

In researching grocery stores, our team found that 88% of loyalty-card holders were clients of the store two years before joining the program. Loyalty programs often fail to attract the competition's customers because the rewards aren't compelling enough to make them want to switch brands or stores. Indeed, the proliferation of loyalty programs offering the same kinds of rewards has destroyed a key reason for them in the first place: differentiation.

A more effective way to woo customers and maintain their patronage is to offer them individualized rewards, based on what they value. By offering different types of rewards to different groups of shoppers, companies set themselves apart and give people a reason to keep coming back. Providing access to a speedy checkout lane, for example, would be a more powerful way to win the loyalty of a person who hates grocery shopping than would a discount on a future purchase.

Intrinsic rewards are those that match up with a consumer's natural purchase motivations; extrinsic rewards are those that sit apart from a person's normal shopping goals. A monetary reward would be intrinsic for a person who bases purchase decisions on price; it might be extrinsic for a consumer who shops for pleasure.

An extrinsic reward can motivate a person to take action, but the change probably won't last long. That's because the reward is "buying" a person's interest in making the purchase instead of reinforcing the person's natural inclination to do so. That puts the focus on the prize, instead of the brand or store, so when the reward is collected, the motivation to repurchase quickly disappears. This type of reward may even reduce a consumer's intrinsic interest in making a purchase.

Intrinsic rewards, meanwhile, reinforce a person's natural shopping motivation. Consumers will perceive intrinsic rewards and the loyalty programs that offer them to be valuable, increasing the likelihood that they will resist competitors' offers and stay loyal to a brand or store.

■ Weigh other factors that may influence the effectiveness of reward types.

Reward types can become more or less compelling, depending on the type of product or service being sold.

Intangible rewards such as beauty advice and special services are more effective when the product or service being sold is expensive and requires some thought and effort to purchase -- luxury goods, cars, and cosmetics are good examples. That's because those types of rewards can be used to emphasize a brand's image and uniqueness, giving shoppers a reason to continue making repeat purchases.

Immediate, tangible rewards such as "buy one, get one half off" promotions work best when the product being sold requires little effort to purchase and poses little risk to the buyer -- things like toilet paper, chewing gum or noodles. The downside to immediate, tangible rewards is that they do little to reinforce the value or uniqueness of a brand, so consumers tend to focus more on the prize than on the product being promoted. . . .

Perhaps the best approach when it comes to loyalty programs is to use them to get to know customers -- how much they spend, what kinds of promotions they respond to and what things they value. Collecting and analyzing this data would allow companies to identify the customers they consider most important and target them with appropriate rewards offers, increasing the likelihood of retaining their patronage and capturing a greater share of consumer dollars overall.

The contention that loyal customers are always more profitable is a gross simplification.

http://sloanreview.mit.edu/smr/issue/1997/summer/6/

Linking Customer Loyalty to GrowthBy Timothy L. Keiningham, Lerzan Aksoy, Bruce Cooil and Tor Wallin Andreassen (Summer 2008) The authors argue that there is no single metric that equates the entire customer experience.

http://sloanreview.mit.edu/smr/issue/2008/summer/14/

Throttling the CustomerBy David Wagner (Summer 2006)

Long a strategy in business-to-business settings and the insurance sector, firing the customer consists of identifying and purging your portfolio of the least profitable customers in order to increase margins or concentrate on your best clients.

Here is how to build a loyalty program with the best chance of paying off:

■ Group customers according to purchase motivations.

To create customized loyalty programs, companies need to understand what drives various clients to make purchases. To get this information, they can survey shoppers on their purchase motivations, analyze the data customers provide on loyalty-program enrollment forms and review shoppers' transaction histories.

. . .

Motivations can vary, depending on what a person is buying. . . .

Companies can use customers' ages, incomes, sex and other factors to draw general conclusions about what motivates them to make purchases. In grocery stores, younger customers generally tend to be economical consumers, but also hedonistic ones. Older clients with higher incomes tend to be relational and routine-loyal consumers but also functional ones. Consumers with low incomes are usually economically orientated, while women are more hedonistic. Men, especially executives, generally are more functional.

■ Determine if customers perceive a loyalty program's rewards to be valuable.

Shoppers will change their buying behavior in response to a reward if they judge the value of that reward to be higher than its cost -- the obligation to make a future purchase or to give out an email address, for example. An important step in designing rewards, then, is to make sure customers perceive them as being valuable.

Our team grouped reward types into five categories and identified the groups of shoppers most likely to view them as valuable:

--Economic rewards include things such as price reductions and purchase vouchers. People most concerned about their budgets will perceive these types of rewards as valuable.

--Hedonistic rewards include things such as points that can be exchanged for spa services or participation in games or sweepstakes. These rewards have more emotional value and will attract people who shop for pleasure.

--Social-relational rewards include things such as mailings about special events or the right to use special waiting areas at airports. Consumers who want to be identified with a privileged group will value these kinds of rewards.

--Informational rewards include things such as personalized beauty advice or information about new products or services. They will attract consumers who like to stick with one brand or store.

--Functional rewards include things such as access to priority checkout counters or home delivery of groceries. Consumers who want to reduce the time they spend shopping will value these most.

(“Full disclosure”: An operating unit of G.E. was a former ad agency client.)

~ ~ Bob

Excerpts from BusinessWeek “Management” Column(January 30, 2006):

“Would You Recommend Us?That simple query to customers is shaking up planning and executive pay.”

By Jena McGregor

It wasn't exactly Thomas Edison and the lightbulb, but for Peter McCabe, it was a eureka moment all the same. In the fall of 2004, McCabe, chief quality officer for General Electric Co.'s health-care business, read a Harvard Business Review article recommended by a colleague. It suggested companies measure customer loyalty by asking one simple question rather than relying on lengthy satisfaction surveys: "On a scale of zero to 10, how likely is it that you would recommend us to your friends or colleagues?"

The article showed that "net promoter scores," which measure the difference between the percentage of customers who give high responses ("promoters") and those who give low ones ("detractors"), correlate closely with a company's revenue growth. Promoters are defined as customers who give the company 9 or 10, while detractors hand out "0" through 6. Customers who log 7 or 8 are deemed "passively satisfied" and aren't calculated in the final score. The article's finding stopped McCabe in his tracks. "Wow, this is kind of perfect," he thought.

McCabe and others at the famously metrics-driven company had been looking for a better way to measure customer loyalty. At the time, some of GE Healthcare's units were using traditional customer satisfaction questionnaires as a gauge. But those indicated only vague feelings rather than the more telling action of praising a product to a friend -- and they didn't track with repurchase rates. As a result, such surveys often got the brush-off from employees who saw them as a "hobby" of the marketing or quality-control department, says McCabe.

He and other GE Healthcare executives quickly rolled out net promoter scores in place of the satisfaction surveys some divisions were using. . . . CEO Jeffrey R. Immelt greeted the approach with enthusiasm.

As a result, in 2006 all GE businesses must report net promoter scores for the first time. "I have little doubt that this will be as big and long-lasting for GE as Six Sigma was," says McCabe of GE's vaunted and much-copied quality system.

With rhetoric like that, it's no wonder net promoter scores are becoming a popular, and, many say, powerful way to measure customer loyalty, drive compensation, and flag troubled products. By asking customers whether they would put their own credibility on the line by recommending a company to a friend, net promoter scores, say fans of the concept, are truer indicators of loyalty and future behavior and, therefore, sales growth. American Express Co.'s U.S. consumer-cards president, Jud Linville, calls the scores a "beacon." Management and information technology consulting firm BearingPoint Inc. is considering tying bonuses to the scores after it found that clients that give high net promoter scores also show the highest revenue growth. Software maker Intuit Inc. is even reporting its scores in conference calls with analysts.

The approach is gathering steam at a time when CEOs are increasingly focused on getting closer to customers. It also plays into the executive lament that loyalty management programs, which track customer retention, are among the most ineffective tactics in their toolbox. Pair that with mounting recognition of the power of word of mouth and social networks, and it's easy to see why buzz is building. There's even a book on the horizon: The Ultimate Question by Fred Reichheld, founder of Bain & Co.'s loyalty practice and author of the article that piqued McCabe's interest, is due out on Mar. 2.

A year ago, Mark Dillon was fed up with General Electric Co. He had waited six months for GE's Capital Solutions group to approve a loan so he could open an Applebee's restaurant in Wisconsin. When a survey firm called soon after and asked how likely, on a scale of zero to 10, he would be to recommend the GE unit to a friend, Mr. Dillon responded, "one."

He wasn't alone. The survey revealed poor scores and stinging feedback from the unit's customers. In response, GE streamlined its loan process. Mr. Dillon recently tried GE again and closed a complex deal in 60 days. "Something changed," he says. "It was refreshing to say the least."

To GE executives, Mr. Dillon's experience shows the value of the "net-promoter score," a tool for tracking customer sentiment that focuses on one question: How likely are you to recommend us to a friend?

Respondents are grouped into "proponents," "detractors" and "passives." Adherents say the concept, being promoted by consulting firm Bain & Co., allows them to track, and quickly address, customer concerns.

GE is using the concept in all of its businesses, to reach customers from homeowners purchasing a refrigerator to hospitals buying medical equipment. Chief Executive Jeffrey Immelt highlights the net-promoter score as a key part of GE's growth formula. GE executives say the concept improves on past customer-tracking efforts, a patchwork of surveys and anecdotes.

"It's very hard to mobilize resources when you just have a comment here and there," says Paul Bossidy, chief executive of the capital-solutions unit, which offers business loans and leases on products from printers to corporate jets.

Beyond GE, Bain started offering the system to clients globally about six months ago, although a few, including American Express Co., had already been using it. Bain Director Emeritus Fred Reichheld says he was inspired by Enterprise Rent-A-Car Co. Chief Executive Andrew Taylor, who introduced an 18-question survey to gauge customer satisfaction in 1994. Four years later, Mr. Taylor condensed the survey to two questions, so more customers would participate. The key insight: Customers are three times as likely to return if they are completely satisfied, Enterprise says.

. . .

At GE, Mr. Immelt has made the customer surveys a priority, telling managers in January that it would be a factor in their bonuses.

GE asks customers to rate on a scale of zero to 10 how likely they would be to recommend the company to a friend. Those who rate GE a nine or 10 are promoters, seven or eight passives, and six or lower detractors. To create a net-promoter score, the company subtracts the detractors from the promoters.

GE's diverse businesses have deployed the survey at different speeds with varied results. GE Capital Solutions has been surveying about 1,000 of its one million clients each month for the past year.

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Go to original Wall Street Journal article to see accompanying exhibit.

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